BONDS: EGBs-GILTS CASH CLOSE: Bunds Outperform Amid US Tariff-Driven Volatility
European yields fell sharply Monday in a bull steepening move inspired by US tariff policy uncertainty.
- Safe-haven instruments were bid early after the weekend's news that US President Trump announced he would follow through with tariffs on Mexico, Canada and China starting Feb 4, with equities falling and the dollar soaring.
- Yields were hitting fresh lows when headlines emerged that US tariffs on Mexico would be postponed for one month. Uncertainty over US tariffs lingers after the cash close, with levies set to be imposed on Canada and China overnight.
- Earlier firmer-than-expected Eurozone January flash inflation data helps contain the downside in Bund yields.
- Bunds outperformed Gilts (in part due to perception that the UK would be less tariff-targeted by the US than the EU), with bull steepening in both curves though a touch of belly outperformance in the UK.
- While periphery EGB spreads widened, French OATs impressed in the semi-core space: the French socialist party decided not to support the censure motion against PM Bayrou.
- Apart from tariff developments, Tuesday's European calendar includes Spanish labor market and French budget data, with an appearance by ECB's Villeroy.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is down 8.5bps at 2.034%, 5-Yr is down 8bps at 2.155%, 10-Yr is down 7.5bps at 2.385%, and 30-Yr is down 7.4bps at 2.639%.
- UK: The 2-Yr yield is down 5.4bps at 4.165%, 5-Yr is down 6.3bps at 4.161%, 10-Yr is down 5.1bps at 4.487%, and 30-Yr is down 3.6bps at 5.09%.
- Italian BTP spread up 2.4bps at 111.7bps / French OAT down 1.2bps at 72.2bps
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Historical bullets
JGB TECHS: (H5) Returns Lower
- RES 3: 149.55 - High Mar 22 (cont)
- RES 2: 147.74 - High Jan 15 and bull trigger (cont)
- RES 1: 144.48/146.53 - High Nov 11 / High Aug 6
- PRICE: 142.12 @ 15:01 GMT Jan 03
- SUP 1: 141.65 - Low Dec 30
- SUP 2: 141.56 - 1.764 proj of the Aug 6 - Sep 3 - 9 price swing
- SUP 3: 141.05 - 2.000 proj of the Aug 6 - Sep 3 - 9 price swing
Markets slipped on the hawkish Fed and are yet to fully recover, touching 141.65 on the way lower. Medium-term trend signals on the continuation chart continue to point south. A resumption of the trend would pave the way for a move towards 141.56, a Fibonacci projection point on the continuation chart. A stronger recovery would open 144.48, the Nov 11 high. Further out, key resistance is at 146.53, the Aug 6 high (cont).
USDCAD TECHS: Bull Flag Highlights A Clear Uptrend
- RES 4: 1.4669 2.0% 10-dma envelope
- RES 3: 1.4539 3.382 proj of the Oct 17 - Nov 1 - 6 price swing
- RES 2: 1.4508 3.236 proj of the Oct 17 - Nov 1 - 6 price swing
- RES 1: 1.4467 High Dec 19
- PRICE: 1.4392 @ 15:50 GMT Jan 3
- SUP 1: 1.4336 Low Dec 20
- SUP 2: 1.4307/4232 20-day EMA / Low Dec 17
- SUP 3: 1.4136 50-day EMA
- SUP 4: 1.4011 Low Dec 5
USDCAD is unchanged and bulls remain in the driver’s seat. The latest pause appears to be a flag formation - a bullish continuation signal. Note too that moving average studies are in a bull-mode position, highlighting a dominant uptrend. Sights are on 1.4508 next, a Fibonacci projection level. Initial firm support to watch lies at 1.4307, the 20-day EMA. A pullback would be considered corrective.
AUDUSD TECHS: Southbound
- RES 4: 0.6471 High Dec 9
- RES 3: 0.6408 50-day EMA
- RES 2: 0.6341 High Dec 18
- RES 1: 0.6247/6282 High Dec 30 / 20-day EMA
- PRICE: 0.6204 @ 15:21 GMT Jan 3
- SUP 1: 0.6179 Low Dec 31
- SUP 3: 0.6158 1.236 proj of the Sep 30 - Nov 6 - 7 price swing
- SUP 3: 0.6100 Round number support
- SUP 4: 0.6045 1.500 proj of the Sep 30 - Nov 6 - 7 price swing
A bearish trend condition in AUDUSD remains intact and the pair continues to trade closer to latest lows. Recent weakness maintains the price sequence of lower lows and lower highs. Note that moving average studies are in a bear-mode position too, highlighting a dominant downtrend. Scope is seen for an extension towards 0.6158 next, a Fibonacci projection. Initial firm resistance to monitor is 0.6282, the 20-day EMA.
